Boeing says production system was braced for tornado

By Kyle Peterson

6 Min Read

(Reuters) - Boeing Co (BA.N) said on Monday its production system has a cushion in place to help absorb disruptions caused by a weekend tornado that hit Spirit AeroSystems (SPR.N), which makes its 737 fuselage and parts of other planes.

Spirit, based in Wichita, Kansas, shut down temporarily after a tornado damaged roofs and cut power in Iowa, Kansas, Nebraska and Oklahoma on Saturday night.

Spirit, Boeing's biggest supplier of structural components, said it did not yet know the full impact on production, but operations would be suspended at least through Tuesday and near-term deliveries would be affected.

Spirit makes part of the fuselage for the high-profile Boeing 787 Dreamliner and 35 fuselages each month for the best-selling 737, which is assembled in Renton, Washington.

Boeing, which is increasing the production rate of the 737 and other planes, declined to say whether the disruption would slow aircraft deliveries to its customers.

"Boeing typically has a cushion in its production system to account for potential disruptions," Boeing spokesman Larry Wilson said, adding that the company would know more over the "next several days."

Wilson declined to elaborate on the cushion or say if was sufficient to prevent production disruptions on any Boeing programs that Spirit supports.

But analysts say Boeing may have enough parts in its inventory or could slow down production to deal with the supply disruption.

Experts say the 737 is more vulnerable to shocks than the 787 or other airplane programs because of its rapid production pace.

"We're working closely with Spirit on that to try and understand any potential impacts," Wilson said.

Boeing has 2,679 unfilled orders for 737s on its books, according to its website.

A Spirit spokesman said operations would restart when it is safe for employees to enter the plants. The company's Wichita operations are spread across 45 buildings, he said.

"The majority of what we're dealing with is infrastructure impact, not production capability impact," said spokesman Ken Evans. "We believe that our essential ability, once we make the site safe to start production again, we're going to be able to start production fairly quickly."

Evans said Boeing is Spirit's largest customer and that 85 percent of its work is for the plane-maker. He said work on the 737 draws about 50 percent of Spirit's revenue.

"We make a portion of every Boeing commercial aircraft in production," Evans said.

Spirit ships the fuselages for 737s to Renton by train, where they wait outside the plant for their turn in the final assembly line. Boeing declined to say how many fuselages were enroute to Renton since Spirit shut down. The company also declined to say how many fuselages it had ready for assembly.

Rob Stallard, an analyst with RBC Capital Markets, said Boeing's delivery outlook has "an element of contingency" to cover unforeseen events like this and unless there is an extended break in shipments from Spirit, its earnings outlook will not change.

"Although Boeing does not have a large amount of spare inventory, the various aircraft lines have not been stopped by this event, though the full situation is still being assessed and this could yet occur," Stallard said.

Boeing makes 35 737s per month and aims to boost production to 42 to per month.

The 737 is the domestic workhorse for many airlines across the globe. It competes with the Airbus A320. Boeing and Airbus intend to update those planes with new fuel-efficient engines.

Boeing will call its upgraded 737 the MAX. The upgraded airbus narrow-body will be known as the neo. Herbert said the weekend disaster would likely have no impact on those upgrades.

Hans Weber, president of technology management consultancy Tecop International, said a disruption of parts from Spirit could cause Boeing to slow production on the 737 temporarily but not stop it.

"You cannot have an inventory of fuselage sections. There is just really no room," Weber said. "So a delay in delivery of fuselage sections for the 737 would inevitably cause some slowing down of the production rate."

"I seriously doubt that the disruption might be more than a day or two," he said.

Spirit makes the forward fuselage, including cockpit and cabin, for the Boeing 787 Dreamliner, Boeing's new carbon-composite aircraft that came to market last year after three years of delays. The company lists 843 unfilled orders for Dreamliners on its website.

Boeing, the world's second-largest commercial plane-maker after EADS EAD.PA unit Airbus, made first delivery of a Dreamliner last year and is ramping up production to 10 planes per month by the end of 2013, a target many experts believe to be unattainable.

Weber said the disruption at Spirit poses less risk to the 787 program because Boeing can use downtime on the line to address a backlog of other work on assembled planes that it has yet to deliver. Such work is typical for new aircraft programs.

Spirit, a Boeing unit until it was sold in 2005, also makes part of the upcoming Airbus A350 and A320.

One industry expert said the damage at Spirit could hit Boeing deliveries in the second quarter. Plane-makers typically are paid upon delivery.

"Based on what I've seen it looks like it could lead to some sort of disruption," said Wedbush Securities analyst Kenneth Herbert. "But it looks like the tooling is relatively intact at Spirit, so I'm not expecting any long-term disruption."

Shares of Boeing closed down 24 cents at $72.68 on the New York Stock Exchange.

Reporting By Kyle Peterson in Chicago, Sagarika Jaisinghani in Bangalore and Karen Jacobs in Atlanta; Editing by Maureen Bavdek and Richard Chang